Low Mortgage Rates to Boost Housing Market: 5 Stocks to Buy

The Federal Reserve’s three consecutive interest rate cuts during the second half of last year and decision to hold rates steadily throughout 2020 have aided the U.S. housing market.

Moreover, in the last few weeks, fears about the coronavirus pandemic made investors rush for treasury bonds as a safe haven. With the rising demand for treasury bonds, interests dropped, which also impacted mortgage rates.

On Feb 6, Freddie Mac stated that the average for a 30-year fixed-rate home loan declined to 3.45% from 3.51% the week before. This was the third consecutive week of decline.  The last time the rate was at or below this level was in October 2016, when it averaged 3.42%. Additionally, the 15-year fixed-rate mortgage dropped to 2.97% for the first time since 2016.

U.S. Housing Industry to Expand in 2020

Mortgage rates declined due to lower interest rates last year, and now the widespread fears over coronavirus have resulted in further decline. And that’s certainly a blessing for the U.S. housing market.

The Mortgage Bankers Association stated that declining mortgage rates created a rush for refinance. Mortgage applications rose 5% for the week ending Jan 31, which was led by a 15% rise in refinance applications. Demand for refinancing was the highest since June 2013.

Millennials are a key catalyst, contributing to expansion of the housing space. In fact, the majority of Gen Y will be turning 30 this year, a prime age considered to buy home. This in turn will increase the demand for entry-level homes. And why not? Thanks to low mortgage rate that helps in overcoming high debt and financial restraints, Millennials are going to take out more than half of new mortgages in America.

While baby boomers look for apt weather, lower taxes and low cost of living to enjoy their retirement life, millennials are searching for family-friendly lifestyles and affordable places to stay.

The rise in demand is evident from the increase in construction of new homes, which grew 16.9% at an annual rate of 1.608 million in December. beating the consensus estimate of 1.374 million. The figure marks a 13-year high and is 40.8% above the December 2018 figure of 1.142 million and 2.6% above November’s revised figure of 1.375 million.

On the supply side, sales of previously owned home rose 3.6% in December from the previous month to an annual rate of 5.54 million, according the National Association of Realtors data released on Jan 22. Additionally, existing home sales were boosted by rush in sales of multi-family housing and single-family homes.

5 Stocks to Buy

Thanks to low mortgage rates, investors can make the most by investing in homebuilders and construction related companies. We have shortlisted five such stocks that sport a Zacks Rank #1 (Strong Buy) and are poised to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home KBH is a homebuilding company that builds and sells various homes, including attached and detached single-family residential homes, townhomes, and condominiums primarily for first-time, first move-up, and active adult homebuyers.

The company’s expected earnings growth rate for the current year is 29.1% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 3.2%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 6.4% upward over the past 60 days.

M.D.C. Holdings, Inc. MDC engages in homebuilding and financial service businesses. Its financial services operations comprise originating mortgage loans primarily for homebuyers. The company’s expected earnings growth rate for the current year is 14.3% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 3.2%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 1.2% upward over the past 60 days.

PulteGroup, Inc. PHM engages in the homebuilding business. The company acquires and develops land primarily for residential purposes, including single-family detached, townhouses, condominiums, and duplexes. The company’s expected earnings growth rate for the current year is 17.2% compared with the Zacks Building Products - Home Builders industry’s projected earnings growth of 3.2%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 4.9% upward over the past 60 days.

Orion Energy Systems, Inc. OESX researches, designs, develops, manufactures, implements, markets, and sells energy management systems. The company also provides an array of smart building control systems, which provide lighting control options and data intelligence capabilities for building managers.

Orion Energy Systems’ expected earnings growth rate for the current quarter is more than 100% against the Zacks Building Products - Lighting industry’s projected earnings decline of 2.5%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 274.8% upward over the past 60 days.

Louisiana-Pacific Corporation LPX manufactures building products, primarily for use in new home construction, repair and remodeling, and outdoor structure markets. The company’s expected earnings growth rate for the next year is more than 100% compared with the Zacks Building Products - Wood industry’s projected earnings growth of 9.5%. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 5% upward over the past 60 days.

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